investing amid macro challenges - allan gray …...global equity returns vs gross domestic product...

1Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019

Leonard Krüger

Investing amid macro challenges


• Dark clouds over SA

• Absolute and relative performance

• Valuation opportunities

• Diversified portfolio construction



Global

Slowing growthEurope & EM

BrexitHard / Soft

Trade warUS / China

Investing??

Falling global

interest rates

Geopolitics

Source Various / Allan Gray research

Mature bull marketSearch for yield

Business confidencePMI < 50



South Africa

Unemployment29%

Fiscal deficitJunk status

Popular

despondencyElections

Investing??

SOEs Eskom EAF

71%

Service

protests+40% YTD

Source Various / Allan Gray research

Consumer confidence Migration, housing-, car-,

retail sales

Business confidencePMI < 50


Source:

JSE Top 40

% Top 40 shares within 5% of 1 year low

RMB Morgan Stanley data (LK 31 July 2019)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


Source:

Local shares are making multi-year lows

JSE Top 40 + Midcap Index = 105 Counters

RMB Morgan Stanley data (LK 31 July 2019)

ShopriteSappiCurro

RedefineSupergroup

NetcarePioneerRemgroLiberty

VodacomHyprop

SasolAspen

TruworthsWoolworths

MMILife Healthcare

MassmartRCL Foods

BraitIntu

HammersonNampak

0

5

10

15

20

25

30

35

40

45

50

3 year low 5 year low 7 year low 10 year low 15 year low

# o

f sh

are

s


Source:

Market Returns

Allan Gray research (ARL 31 July 2019)

80

90

100

110

120

130

140

04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 06/2019

TOP4 Other 96


Source:

Performance to 31 July 2019

Allan Gray research, data to 31 July 2019

- 10

- 5

0

5

10

15

20

1 year 3 years 5 years Since Inception

An

nu

alis

ed

retu

rns (

%)

Equity Fund (Inception: 01.10.98) Equity Fund BenchmarkBalanced Fund (Inception: 01.10.99) Balanced Fund BenchmarkStable Fund (Gross of Tax) (Inception: 01.07.00) Stable Fund Benchmark


Relative drawdown Subsequent relative performance (%)

Peak TroughMonths

(peak-to-trough)

Peak-to-

trough decline 1-year 2-year 3-year

Average of first eight 14 (12.9) 17.6 22.3 29.3

Most recent

peak

Most recent

trough

Months

(peak-to-trough)

Peak-to-

trough decline

Jan 18 Jun 19 17 (17.9)

Orbis track record includes multiple periods of underperformanceLessons from the past

100

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

30 Jun 2019 | *The asset-weighted net-of-fee return of all share classes in the Orbis Global Equity Strategy.

Orbis Global Equity Strategy’s cumulative weighted

net* relative performance vs FTSE World Index


Source:

SA Cash vs Equities

Allan Gray research (LK 31 July 2019)

141

129

121

110

90

100

110

120

130

140

150

Cash ALSI AGEF Average Manager


Source:

SA Cash vs Asset Allocation funds

Allan Gray research (LK 310719)

130

142

90

100

110

120

130

140

150

Cash AGBF AGSFSource: Allan Gray research (LK 31 July 2019)


Source:

Real short-term interest rates vs. real returns in SA equities

INET BFA and Allan Gray research, data from 30 November 1970 – 30 June 2019 (SK040719q)

-30

-20

-10

0

10

20

30

40

-15 -10 -5 0 5 10 15

Su

bse

qu

en

t 4

-ye

ar

rea

l re

turn

AL

SI

Real short-term interest rates

15% of the time 15% of the time

47% of the time23% of the time


Source:

Real equity returns are not correlated with GDP growth

Global equity returns vs gross domestic product (GDP) growth, 1970 - 2009

Elroy Dimson, Paul Marsh, and Mike Staunton, Global Investment Returns Yearbook 2010, Credit Suisse Research Institute, 2010.Triumph of the Optimists, Princeton

University Press, 2002.


Source:

2 000

4 000

8 000

16 000

32 000

64 0001

96

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

201

8

18 years 9 years

12 years

ALSI in real terms

IRESS and Allan Gray research, data to 31 July 2019 (SK020819m)


Source:

ALSI in real terms (Today vs 2008 experience)

IRESS and Allan Gray research, data to 31 July 2019 (SK020819m)

Feb 2015

30 000

60 000

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

Hell

Purgatory


Finding ‘real’ opportunities on ALSI

Quant model 4-year Real Total Return prediction for SA equities

Feb 2015

5%

-15%

-10%

-5%

0%

5%

10%

15%

20%

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

Re

al re

turn

per

ann

um

pre

dic

ted

Source: Allan Gray Real EPS Quant model output, data to 31 Aug 2019 (RS290819)


Asset allocation as at 31 July 2019

Allan Gray Balanced Fund

% of Portfolio

Asset Class Total LocalForeign Incl.

Africa

Net Equity 63.1 43.6 19.5

Hedged Equity 7.8 1.9 6.0

Property 1.5 1.3 0.2

Commodity-linked 4.0 3.2 0.8

Bonds 14.3 10.0 4.4

Money Market and Cash 9.3 7.4 1.9

Total 100.0 67.4 32.7

Note: There may be slight discrepancies in the totals due to rounding.

% of Portfolio

Total LocalForeign Incl.

Africa

35.0 20.8 14.2

7.5 2.1 5.4

4.0 3.8 0.2

2.7 1.7 1.0

28.8 19.2 9.6

22.0 17.9 4.1

100.0 65.5 34.6

Allan Gray Stable Fund


Top 10 Equity positions

Allan Gray Balanced Fund Orbis Global Equity Fund

Allan Gray Balanced Fund % of Fund

Naspers (*) 7.0

British American Tobacco 5.1

Glencore 3.0

Sasol 2.9

Remgro 2.7

Standard Bank 2.3

Investec 2.2

Woolworths 1.8

Old Mutual 1.7

Life Healthcare 1.4

Total 30.0

Stocks % of Orbis Funds

NetEase 8.0

XPO Logistics 5.7

Naspers 5.5

AbbVie 4.3

Sberbank of Russia 3.9

British American Tobacco 3.5

Celgene 3.4

Autohome 3.1

Facebook 2.8

Sumitomo 2.8

Total 43.0Note: (*) Including Naspers Stub certificate.


Diversified portfolios for a wide range of potential outcomes


Real assets exposure – 70% of fundRand hedge – 64% of fund

“Failed state” – 36% of fund Foreign currency exposure – 60% of fund

SA equities; 28%

Foreign cash / bonds; 12%

Foreign equities; 20%

Commodities; 4%

US Dollar; 28%

GBP; 4%

Euro; 8%

Yen; 2%

Other; 17%

Source: Allan Gray Research (LK31082019)

SA Government; 4%

SOE; 1%

Banks; 16%

SA Inc; 15%

South Africa; 45%

Commodities; 5%

Foreign Equity; 20%


Investing amid macro uncertainty

Absolute performance tough and relative performance disappointing

Stay the course, valuation trumps macros

Allan Gray and Orbis not panicking, resolve unchanged

Building diversified portfolios, resilient under different outcome

Conclusion


Thank You


Appendices


Absolute Attribution – 12 months to 31 July 2019


Contributors % p.a. Detractors % p.a.

1 Naspers 2.0 1 Sasol -3.8

2 Impala Platinum 1.8 2 British American Tobacco -2.2

3 MultiChoice Group 0.5 3 Glencore -0.9

4 Woolworths 0.5 4 Remgro -0.8

5 Gold Fields 0.4 5 Sappi -0.7

6 BHP Group 0.3 6 Netcare -0.6

7 Fortress REIT 0.3 7 KAP Industrial -0.5

8 Zambezi Platinum (RF) 0.2 8 Aspen Pharmacare -0.4

9 Royal Bafokeng Platinum 0.2 9 Brait SE -0.4

10 Capitec Bank 0.2 10 Tongaat Hulett -0.4

Other Contributors 1.3 Other Detractors -3.5

Total Contributors 7.6 Total Detractors -14.3

Total Performance -6.7

# Returns are shown for the share carveout

There may be slight discrepancies in the totals due to rounding

StatPro Performance and Attribution systems are used to perform the attribution


Relative Attribution – 12 months to 31 July 2019

Allan Gray Balanced Fund vs ALSI


1 Impala Platinum O 1.3 1 British American Tobacco O -2.0

2 Shoprite U 0.4 2 Sasol O -2.0

3 Aspen Pharmacare U 0.4 3 BHP U -1.6

4 Woolworths O 0.3 4 Glencore O -1.2

5 MultiChoice O 0.3 5 Anglo American U -0.8

6 Intu Properties U 0.3 6 Anglogold Ashanti U -0.7

7 Firstrand U 0.2 7 Remgro O -0.7

8 Mondi U 0.2 8 KAP Industrial O -0.5

9 Zambezi Platinum (RF) O 0.2 9 Sappi O -0.5

10 Mr Price U 0.2 10 Netcare O -0.4



Total Relative Performance -8.9





Relative Attribution – 12 months to 31 July 2019

Allan Gray Stable Fund vs ALSI


1 Fortress REIT O 1.1 1 BHP U -1.9

2 Impala Platinum O 0.9 2 Glencore O -1.7

3 Pioneer Food U 0.4 3 Brait SE O -1.6

4 Shoprite Holdings U 0.4 4 Sappi O -1.3

5 Old Mutual O 0.4 5 Aspen Pharmacare O -1.2

6 Zambezi Platinum (RF) O 0.4 6 Naspers U -1.0

7 MultiChoice O 0.4 7 Sasol O -1.0

8 Woolworths O 0.4 8 Capital & Regional O -0.9

9 Aveng O 0.3 9 Anglo American U -0.9

10 Royal Bafokeng Platinum O 0.3 10 Anglogold Ashanti U -0.8



Total Relative Performance -8.6





Absolute Attribution – 12 months to 31 July 2019

Allan Gray Equity Fund


1 Impala Platinum 1.9 1 Sasol -4.0

2 Naspers 1.5 2 British American Tobacco -2.0

3 Woolworths 0.5 3 Glencore -0.9

4 BHP 0.4 4 Remgro -0.8

5 MultiChoice 0.4 5 Netcare -0.7

6 Gold Fields 0.4 6 KAP Industrial -0.7

7 Capitec Bank 0.3 7 Sappi -0.7

8 Fortress REIT 0.2 8 Nampak -0.4

9 African Rainbow Minerals 0.2 9 Aspen Pharmacare -0.4

10 Pan African Resources 0.2 10 Investec -0.4



Total Performance -7.4





Naspers – Discount over time

R 0

R 1 000

R 2 000

R 3 000

R 4 000

R 5 000

R 6 000

R 7 000

Tencent Value per Naspers Share Value of Rump Naspers Share Price


Source:

Sasol: LCCP

Sasol company reports, Allan Gray estimates

0

200

400

600

800

1000

1200

1400

-

2 000

4 000

6 000

8 000

10 000

12 000

14 000

Original Aug 2016revision

Feb 2019revision

May 2019revision

OriginalFY2022

May 2019revision

EB

ITD

A (

$ m

illio

ns)

Ca

pita

l in

ve

stm

en

t ($

mill

ion

s)


Source:

British American Tobacco vs Richemont

Allan Gray research, company reports (DA 25 July 2019 NS)

Per share data BAT RICHEMONT

Share price £29 €74

Three-year rand capital return -45% 41%

Three-year rand earnings 23% -17%

PE (x) 9.8 25.8

DY (%) 7.0 2.4

EV / EBITDA (x) 9.4 14.3

Operating margin (%) 42 16

Net debt / (cash) 19.7 -4.5

% share price 67 -6

NGP of sales / Online of sales 4% 16%

NGP of earnings / Online of earnings -4% -6%


Source:

Iron ore: BHP earnings sensitivity

Allan Gray research

Iron ore $115/t $55/t


Source:

-24%

89%

215%

$0

$2

$4

$6

$8

$10

$12

Market price 10x trough cashflow 12x normal cashflow 15x peak cashflow

Glencore, limited downside, attractive upside

Allan Gray research, Company results


Source:

Old Mutual Valuation


Rand per share

Operations R 1.28 eps x 10 PE 12.80

Nedbank 4.93

NAV 8.52

Total 26.26

Total if NAV Discount of 30% 23.70

Upside 23%

Market Price 19.20


Source:

Old Mutual South Africa, EBIT


0,00

0,50

1,00

1,50

2,00

2,50

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Ran

d P

er

sh

are

(E

BIT

)

Normal


Source:

Voter despondency in general elections

Service delivery protests YTD +40%

Unemployment at record level of 29%

Eskom productivity indicators at all time lows (EAF =71%)

98% of houses are sold below asking price

Luxury car sales -18% yoy

30% of food sales on promotion

Local cement producer volumes -10-15%

It’s brutal out there!

Various sources, Allan Gray research (LK 31 July 2019)

investing amid macro challenges - allan gray …...global equity returns vs gross domestic product...

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